What are non-compete clauses and are they enforceable in New Jersey?

What are non-compete clauses and are they enforceable in New Jersey?

Noncompete agreements, restrictive covenants, covenants-not-to-compete, and garden leave – these are just some of the ways to refer to post-employment contracts that contain a provision that limits an employer’s former employee’s ability to work. At its essence, a “noncompete” is an agreement between an employer and an employee where the employee promises not to work for a competitor of the employer until after a certain period of time. In other words, a “noncompete” is an agreement that limits an employee’s post-employment job opportunities within a certain area for a specified time.

In New Jersey, noncompete agreements are generally disfavored and a court will only enforce such an agreement if it is reasonable in scope and duration. For example, the New Jersey Supreme Court, in Community Hospital Group, Inc. v. More, 183 N.J. 36 (2005), analyzed the enforceability of a noncompete agreement. In the case, the employer was a hospital and the employee was a physician. The noncompete agreement restricted the physician from engaging in the practice of neurosurgery within a thirty-mile radius of the employer-hospital for a period of two years. The case arose because the physician began practicing neurosurgery at a hospital within the restricted thirty-mile radius. As a result, the hospital sued arguing that the physician breached his noncompete agreement.

In determining whether the hospital’s noncompete agreement was enforceable against the physician, the Court utilized a three-part test, sometimes referred to as the Solari/Whitmyer test, to analyze “whether (1) the restrictive covenant was necessary to protect the employer’s legitimate interest in enforcement, (2) whether it would cause undue hardship to the employee, and (3) whether it would be injurious to the public.”

First, the Court reasoned that the “legitimate interests” of the hospital might include protecting confidential business information (including patient lists), patient and patient referral bases, and the investment and training of the employee-physician. The Court found that the hospital made a substantial investment in the physician by “giving him the opportunity to accumulate knowledge and hone his skills as a neurosurgeon.” Additionally, the Court found that the physician removed patient and patient referral lists, and that many of the physician’s new patients were previously patients of the hospital or were referred to the physician by the hospital’s referral network. Therefore, the Court found “several legitimate protectable interests in enforcement of the restriction.”

Second, as to “undue hardship,” the Court found that the employee-physician was a “highly qualified neurosurgeon” and “his services were in demand.” Additionally, the Court took into account the fact that the physician voluntarily resigned from the hospital. In discussing this fact, the Court reasoned that if the relationship between the employer and employee had terminated in some other way, the Court might be more likely to find the imposition of an “undue hardship” upon the employee. However, given the physician’s promising employment prospects, the Court did not find that the hospital’s restriction imposed an undue hardship on the physician.

Third, the Court looked to whether the noncompete agreement’s terms caused “harm to the public.” Recall that the hospital’s noncompete agreement sought to impose a thirty-mile geographical restriction on the physician’s ability to practice. The physician presented credible evidence to the Court that the thirty-mile restriction would be injurious to the public because there was a shortage of neurosurgeons in that specific area. The Court found this argument particularly persuasive because part of the physician’s new duties required him to attend to neurological patients in an emergency room. That emergency room, however, was located approximately 13 miles from the previous employer-hospital. Despite the fact that the physician was working within the restricted area, the Court ruled that given unique necessity of the physician’s services, the noncompete clause was unenforceable. The Supreme Court ordered the lower court to rewrite the premise limits of the geographical restriction so that it would not exceed 13 miles.

The Community Hospital case illustrates the factual circumstances surrounding a noncompete agreement in hospital-physician relationship. It is worth noting, however, that the enforceability of noncompete agreements is not equal across professions. Courts must review noncompete clauses within the context of the applicable industry. For instance, barbers, cosmetologists, and chefs are all among those professions that have challenged the terms of their noncompete agreements before New Jersey courts. These cases are legally analyzed within the same framework as the Community Hospital case, however, the specific analyses differ based on the subject employee’s profession.